Morrison government disregards calls for a franchising overhaul, opting for minor changes to regulations instead

The Morrison government has balked at calls for an overhaul of franchising, and will instead pursue minor changes to existing regulations, including tougher penalties for franchisors that break the rules.

Seventeen months after a bipartisan parliamentary committee handed down 71 recommendations for reforming Australia’s $180 billion franchising sector, the government tabled its official response on Thursday afternoon.

It claimed to support action to “improve fairness and transparency” for franchisees after years of scandals that have routinely rocked the industry, but fell short of a commitment to implement many of the committee’s key recommendations.

While the 2019 committee concluded the Franchising Code of Conduct — the key document regulating the conduct of franchisors and franchisees— had “manifestly failed to deter systemic poor conduct”, the government believes the “most egregious” behaviour is not widespread.

The government has adopted several recommendations calling for more stringent disclosure and transparency for prospective franchises, including commitments to develop a public register of franchisors and expand what information they’re required to provide about their businesses.

It has also promised to double maximum penalties for breaches of the code from about $66,000 to about $130,000, but this is far short of the committee recommendation to bring penalties into line with Australian Consumer Law, under which maximum penalties are upwards of $10 million per breach.

Elsewhere, the government has accepted the advice of the committee to strengthen the ability of franchisees to break off their contracts during 14-day cooling-off periods, and will also limit the ability of franchisors to require franchisees to undertake significant capital expenditure.

Other key recommendations, such as calls to increase the frequency of franchisor reports about marketing funds and introduce civil penalties for failure to follow existing co-operative fund rules, have been largely ignored.

The government argued moving from annual reporting about marketing funds to quarterly disclosures would be too onerous for franchisors, instead promising to “clarify” requirements relating to the treatment and reporting of franchise funds.

The committee had also recommended that the Australian Competition and Consumer Commission (ACCC) be resourced appropriately to investigate all complaints about unfair contract terms across the franchise sector, but the government — pointing to 2018 reforms that expanded the regulator’s information gathering powers — found existing settings were appropriate.

Unfair contract terms are still not illegal though, and despite the committee calling for the laws to be toughened to prohibit them, the government has still not promised to do so, instead undertaking a lengthy and ongoing consultation process about “strengthening” existing laws.

In other areas the government has decided to implement some of the committee’s advice, although hasn’t made clear whether the reforms will be as stringent as what was recommended.

While the government has promised to amend the franchising code to require franchisors to disclose information on supplier rebates, it did not specify whether this will include a percentage breakdown against purchase prices as the committee advised.

The government has also accepted committee advice to merge the office of the Franchising Mediation Adviser into the Australian Small Business and Family Enterprise Ombudsman (ASBFEO), and will also implement a “voluntary binding arbitration model”.

But it has rejected calls from the committee to fund the combined ASBFEO dispute resolution services with an industry levy based on the number of complaints it receives, arguing such a system would be “open to human error and manipulation”.

Small business ombudsman Kate Carnell welcomed the government’s response to the committee report.

“I am pleased to see that the response picks up on a number of the concerns of franchisees,” Carnell said in a statement.

“My office already deals with a broad range of complaints, centred around these aspects of owning a franchise. We know that the power imbalance between franchisor and franchisee makes negotiating disputes incredibly difficult.”

But Carnell said she remained worried about the government’s desire to undertake further consultation about several committee recommendations.

“I appreciate that this can be a complex area, but it has now taken a full 18 months for the government to respond to the Parliamentary Joint Committee report,” Carnell said.

“Further consultation and delay in effecting change is unacceptable and will continue to heap pressure on small businesses during these extremely difficult times.”

The full response is available here.

NOW READ: Thinking of starting a franchise? Look beyond fellow practitioners and focus on leadership skills when hiring

NOW READ: “It’s accelerated our development by at least eight months”: How 12RND Fitness withstood the closure of 80 franchises during COVID-19